Aviva capital buffer helps shares

Wed 04 Nov, 2009 10:07

By Clara Ferreira-Marques

LONDON (Reuters) - Consumer caution dented insurer Aviva's nine months sales on Wednesday, although its shares rallied on the company's modestly positive outlook and strong capital buffer.

The country's second-largest insurer said life and pensions sales fell 11 percent to 24.1 billion pounds -- just below an average forecast of 24.8 billion -- hit by a weaker than expected performance at home, where sales dropped 25 percent, and at its previously fast-growing U.S. business.

Aviva has said it is focussing on profitable business over volume, and new business margins were broadly stable over the period at 2.1 percent, compared with 2.0 percent a year ago.

It said the outlook for profitability was "good," but cautioned its base case was slow growth from 2010, with little hope of a recovery feeding into sales for another six to nine months for most of its core businesses, including Britain.

"It's very weak. The problem is they are focussing on value over volume, but the margins are not improving either," analyst Peter Eliot at MF Global said. "Operationally there was nothing there that got us excited."

However, shares in the insurer rallied, trading up 6.7 percent at 404.6 pence at 9:22 a.m., making Aviva one of the top gainers among UK bluechips as investors were cheered by its capital buffer.

"Aviva's outlook statement is modestly positive. (The) stock has been a laggard going into the numbers and this might lead to a positive reaction today," analysts at Merrill Lynch said in a note.

"However, with sales being slightly weak and basically inline capital and (embedded value) numbers we see no reason to change our neutral stance on the stock."

Aviva stock has dropped over 15 percent since the end of September, a slight underperformance compared to its European rivals, as the entire sector has been battered by news of the EU-enforced breakup of bancassurer ING .

Aviva's Dutch unit, Delta Lloyd, was sold this week in western Europe's largest initial public offering this year, raising 995 million euros ($1.47 billion) for the UK parent.

Aviva CEO Andrew Moss told reporters on Wednesday that options included restructuring the balance sheet, writing more new business and bolt-on deals. He gave no details on potential acquisitions, though he said the group would, as a matter of course, look at assets put on the block by rival ING.

Analysts said the use of Delta Lloyd capital would be critical to the share performance, with a deleveraging of the balance sheet likely to boost the shares.

SLOW SALES GROWTH TO COME

In Aviva's home market, life and pensions sales dropped 25 percent to 6.67 billion pounds in the nine months, but margins improved to 2.5 percent from 2.1 percent a year ago and the insurer raised its market share to 10.8 percent.

"Our experience would be it could be another six or nice months before that confidence resumes and we see a pickup in consumer behaviour," said Mark Hodges, currently head of UK life insurance and soon to lead the whole domestic business. "I am certainly not feeling bullish around the next 6 to 9 months."

General insurance conditions remained "very challenging."

In Europe, the insurer saw life and pension sales broadly flat at 9.8 billion pounds, and again said it would be another 6 to 9 months before a recovery begins to feed through to sales.

Aviva's U.S. unit has been among the most fast-growing for the group, but it has since pulled back, particularly in funding agreements, badly hit by the credit crunch.

Moss, however, said the group was expecting an improvement.

"If I look at the pipeline of business for the fourth quarter it is looking pretty healthy. I expect, therefore, there will be a reasonable rebound in sales volumes at better, more profitable levels in the fourth quarter," he said.

The insurer said its combined operating ratio was 98 percent in the third quarter, in line with its target of meeting or beating that level for the full year.

Aviva said its insurance group directive surplus totalled 3.7 billion pounds, compared to 3.2 billion at the end of June, not including the impact of the sale of its Australian business.

(Reporting by Clara Ferreira-Marques; editing by Simon Jessop)